The Securities and Exchange Commission (SEC) is investigating insider trading that allegedly took place just prior to the announcement last week of the $45 billion leveraged buyout of TXU Corp. Acting on an SEC plea Friday, a Chicago District Court judge issued summons for “unknown purchasers,” who the SEC claimed benefited from a more than 13% run-up in TXU’s common stock on Feb. 26 when the buyout bid was announced.
The SEC’s court filing said the defendants are not yet known since they made their purchases through foreign brokerage firms. “Those firms in turn cleared the trades through several domestic brokerage firms, which in turn executed the purchase orders through the facilities of the Chicago Board Options Exchange.” The defendants allegedly purchased at least 8,020 call option contracts for the common stock of TXU, which would have earned them more than $5.3 million in trading profits.
The SEC maintains the options purchasers were “in possession of material, nonpublic information about the impending merger” when they made their purchases. The agency asked the court to permanently restrain the defendants from illegal trading, penalize them, and order them to disgorge all profits from the trades, plus prejudgment interest.
The court entered a Temporary Restraining Order freezing assets of certain unknown purchasers of call options for the common stock of TXU Corp., following on the SEC’s complaint that those purchasers engaged in illegal insider trading, in violation of the antifraud provisions of the federal securities laws. In addition to freezing approximately $5.4 million in assets, the Court’s order (i) requires that the Unknown Purchasers identify themselves, (ii)provides for expedited discovery, and (iii) prohibits the defendants from destroying evidence.
The Commission acknowledged the help of the Chicago Board Options Exchange, the Financial Services Authority of the United Kingdom and the Swiss Federal Banking Commission in the investigation.
TXU announced Feb. 26 a merger agreement for the leveraged buyout of the company by an investor group led by private equity funds Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group (TPG) and investment bank Goldman Sachs & Co. TXU shares closed at $67.93 on Feb. 26, up from the previous day’s close by $7.91, or 13.18% (see Daily GPI, Feb. 27).
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